Whose Tax Cuts?

I'm welcoming myself back to the Prospect by declaring a holiday on the payroll tax. Starting as soon as possible, you'll be relieved of payroll taxes on the first $20,000 of your annual income. The tax holiday will last two years. Ballpark cost to the government: $700 billion. We'll pay for it by repealing Bush's estate tax cut, which will also cost around $700 billion. Are you with me? All we have to do is convince Democrats it's a smart move and strike fear in the hearts of enough Republicans to get it passed and signed. We'll start in January when Congress reconvenes.

Bush has a different plan, of course. His goal is to make his whopping $1.35 trillion tax cut permanent. Republicans love forcing Democrats to vote for or against tax cuts. It puts Democrats into a Republican box. Bush did it last year and it worked. But having lost both houses of Congress, Democrats should have learned their lesson. Avoid the Republican box. Instead, force Republicans into a Democratic box. Make them choose between a payroll tax cut for more than 130 million American working families, worth about $5,000 to each family, or a tax cut for the richest 2 percent of American families, worth millions to each of their do-nothing kids. If Republicans are too dumb to choose a payroll tax cut over an estate tax cut, Democrats should blast them. Use it as ammo for 2004. Make it a central part of the Democratic message. Yell about it on television, radio. Bellow about it from rooftops.

Everyone hates taxes, but the payroll tax has got to be the worst. Four out of five American workers pay more in payroll taxes than they do in income taxes. The payroll tax is also regressive as hell -- poorer workers pay proportionately more than richer ones. It's paid out of the very first dollar earned, all the way up to a threshold that's now roughly $80,000. After that, nothing. (Wealthy earners pay only the tiny Medicare portion of the payroll tax on all their earnings.) So the very rich get finished paying almost all their payroll taxes early in the year. Bill Gates is done a few minutes past midnight, New Year's Eve. True, poorer retirees get back more each year from Social Security and Medicare than richer retirees, relative to the yearly payroll taxes they contributed when they worked. But poorer retirees don't live nearly as long as richer ones. So, overall, the system's still regressive.

A larger and larger portion of federal revenues have been coming from payroll taxes. At the end of World War II, it was only 2 percent. Now it's 37 percent. That's because most major tax cuts of past 25 years have been heavily tilted toward the rich. The biggest tax increase has been the payroll tax, which rose substantially in the 1980s.

The estate tax is almost a mirror image of the payroll tax. Ninety-eight percent of American families don't come near it. Half of all estate taxes collected by the federal government in 1999 came from 3,300 family estates. That's less than two-tenths of 1 percent of American families. A quarter of all estate taxes came from just 467 families, each of which was worth more than $20 million. I mean, we're not even talking about the upper-middle class. We're talking about the super, super rich.

Besides, a payroll tax cut will be a boon to the economy, stimulating more spending just when we need it. If you hadn't noticed, we're in one of the most anemic recoveries on record -- so anemic it's about dead. The Federal Reserve can't kick-start the economy even after 12 rate cuts. The reason is that we still have a lot of productive capacity that's not being used because there aren't enough customers for all the goods and services that can be produced. Bottom line: Businesses won't invest a penny more in new equipment or new jobs until consumers buy more.

The best way to get consumers to buy more is to put more money in their pockets. And the easiest way to do this is by cutting payroll taxes. There's a bonus. Because employers will no longer have to pay their share, they'll have an extra incentive to keep more people on their payrolls. The Bush estate tax cut, on the other hand, has virtually no stimulative effect on the economy. It gives more money to a handful of rich families that already spend as much as they want. And most of the estate tax cut won't happen for years anyway.

Anyone worried that a payroll tax cut will hurt Social Security or Medicare doesn't understand federal budgeting. Every tax dollar the government collects is the same as every other dollar. Repeal the estate tax cut and the federal government gains $700 billion, making up for the $700 billion it loses by cutting the payroll tax for two years. Forget the "trust funds." They're just a matter of accounting.

Framing it as a choice between the two cuts also serves a larger purpose. It draws public attention to the scandal of the widening gap of income and wealth in America over the past two decades. After-tax incomes of the top 1 percent of American families have risen more than 150 percent, while the vast majority of families in the middle have barely gained ground. America hasn't experienced this degree of inequality in more than 80 years.

Part of the widening gap is due to a shift in economy, away from standardized production and good unionized jobs and toward constant innovations requiring more specialized knowledge. But it's also the consequence of government policies that have favored the rich and powerful while doing little or nothing to help everyone else through the transition. The Bush estate tax cut is Exhibit A.

The choice between the two tax cuts also shows which party favors people who work for a living. The payroll tax penalizes work; cutting it rewards work. By contrast, the estate tax was enacted to prevent family dynasties whose heirs would never need to work. Cutting the estate tax rewards idleness.

So there you have it: a clear choice that speaks volumes. Democrats had no message in 2002 and paid the price. Bush had a tax cut and a war on terrorism. You can't fight something with nothing. If Democrats want to win back at least one chamber of Congress and have a fair chance of regaining the White House two years from now, they'll have to fashion a tough but humane foreign policy and a plan to get the economy moving. Most importantly, they'll need to remind Americans what's at stake: a democratic society that offers the world a model of equity and opportunity or one that's run by and for the people at the top. Some choice.

Senate Republicans are using the Boston attacks as an excuse to stymie immigration reform.

About the Author

Robert B. Reich, a co-founder of The American Prospect, is a Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. His website can be found here and his blog can be found here.